The question of when—or if—inflation will rise is important to all investments, but especially vital to the outlook for monetary metals: gold and silver. I’m bullish on both because I expect much higher inflation ahead, and I’ll tell you why.
But first, I should say that the price of gold or silver at any particular time is of almost no importance to me as a person who accumulates bullion for long-term wealth preservation. Sure, I prefer to buy more when prices are down, but I don’t really care what happens next. An ounce of gold or silver is an ounce of gold or silver, whatever’s going on in the world.
For thousands of years, gold has been the best means of holding wealth to liquidate in case of need or opportunity, or to pass forward to the next generation. The advent of paper money—and now cryptocurrencies—doesn’t change this.
Speculating on rising gold or silver prices is an entirely different thing—with or without the added leverage of speculating via related stocks.
Suppose I buy a gold mining stock for capital gains (not for dividends), for example. Share prices might rise if the company grows or makes a substantial new discovery, but that’s never certain. What is more reliable is that if gold prices rise, so will share prices.
It’s even simpler if I’m buying gold not as a form of savings, but as a speculation on higher prices.
In either case, what’s happening to competing forms of money—inflation or deflation of the USD, EUR, CHF, JPY, CNY, etc.—is a direct and powerful driver.
Yes, wars, pandemics, and other crises can impact gold prices as well, but this “fear trade” tends to be temporary. It’s generally never as powerful as people expect it to be.
Whether they circulate widely or not, gold and silver are forms of money. As such, monetary and fiscal policy are the most important drivers for monetary metals in today’s economy.
But it’s not as simple as creating money results in sending most prices higher. That would have been directly the case back when gold and silver coins were money. But ever since the advent of paper money and the fractional reserve banking system, the impact of increasing the money supply can be magnified or minimized by changes in the velocity of money.
Advocates of so-called Modern Monetary Theory and other excuses for more government spending often point at low CPI figures after the massive money-printing in the wake of the Crash of 2008 as proof that it’s safe to print all the money the current crisis requires. Or more.
Some go so far as to say that printing money has nothing to do with inflation at all. The fact that the USD serves as the world’s reserve currency, they argue, makes it immune to high inflation. This is silly. Send everyone in the US a government check for $1 million and see what happens.
It’s no good to say, “We wouldn’t go so far!” If creating enough money out of thin air to give everyone a million bucks would cause inflation, money-printing does matter. Giving everyone a few thousand dollars may matter less, but it still matters. And if you keep doing it, it will matter more and more over time.
It's not that the post-2008 money-printing didn’t matter, but that much of its impact that’s tracked by CPI was offset by reduced velocity of money.
It’s also simply wrong to point at CPI and say there was no inflation.
If higher prices are caused by more money chasing after the same goods, then it matters where the newly printed money goes. If it’s distributed broadly, we’d see inflation in broader measures. But after 2008, much of it was focused in the financial sector, where it stayed (the banks sure didn’t want to risk making loans in a crisis), producing prodigious inflation in stocks, housing… and gold, among other assets.
So here we are in another economic crisis, with the advocates of government profligacy calling more loudly than ever for spending without restraint.
We’re told we can print all the money we want and nothing bad will happen. And we’re told we must do so or the consequences will be too dire to face. A decade of lower-than-expected inflation in the developed world proves that it’s safe.
So what makes me so sure these arguments are wrong?
Two key facts:
- There’s a lower limit to the velocity of money. It can’t be reduced to zero without destroying all credit and putting the economy on a cash basis.
- There’s no limit to how much money can be printed. As per my million-dollar handout example, if you print enough of it, there will be price inflation.
But couldn’t there be a correct balance between profligacy and frugality to maximize economic benefit?
Perhaps, in theory—but I doubt any mortal could figure that out.
Better to leave it to market forces.
I certainly don’t think today’s central bankers have it all sorted and under control. I suspect they see the global economy as having gone beyond the point of no return. They think they have no choice but to pass between Scylla and Charybdis, knowing it’s an impossible task.
At least, it has been throughout all of history.
No form of currency has ever survived debasement by the state once restraint is lost.
It’s arrogant, if not ignorant, for modern advocates of money-printing to imagine they’re smart enough to pull it off.
It’s the problem of the seen and the unseen that Bastiat wrote about centuries ago, all over again. The seen here is the irresistible, instant gratification of money-printing to politicians and wannabe social engineers. The unseen is the distortion of incentives and destruction of value resulting from the delayed effect of that same money-printing.
This makes it all the more likely that the powers that be will go too far.
By the time they realize they’ve printed too much, it will be too late.
And that’s why the printing press always wins in the end.
As grim as this is for the US and global economies, it’s bullish for gold and silver. I’m speculating accordingly.
That’s my take,
P.S. To be kept abreast of more dangers, opportunities, and issues affecting investors, please sign up for our free, no-spam, weekly Speculator’s Digest.
